Schork Oil Outlook: How Much Are Consumers Willing to Spend at the Pump?

On Monday we saw the latest personal income and expenditure numbers. Income rose 0.4%, in line with analyst expectations, while spending rose 0.7%, beating analyst expectations of a 0.5% increase. We were encouraged by expenditure on housing and utilities rising 0.75%, its second consecutive MoM increase after three months of drops. Meanwhile expenditure on motor vehicles and parts rose 0.94% in December after a disappointing 2.42% drop in November.

Most relevant to the markets is likely expenditure on gasoline and other energy goods, which rocketed 9.78% higher, the largest MoM % increase since June 2009. In turn, the YoY surplus spiked from 6.02% to 16.01% and the % of total expenditure on gasoline and energy goods rose to 3.82%, its highest value since October 2008.

In practical terms, consumers are spending 3.8 cents of every dollar at the pump, is this sustainable? Today’s issue of The Schork Reportcharts the regression between forecast PCE%Gas against the actual values.

We spent much of the last two years spending less of our dollar at the pump than would be expected given historical spending trends and futures market pricing. In 2010 we should have seen PCE%GAS at 3.52%, instead it came to just 3.26%.

To make up for this shortfall, producers and merchants will likely be happy to see higher prices bringing spending at the pump in line with spending elsewhere. We are approaching ‘equilibrium’ in December with a forecast level of 3.86% as compared to the actual of 3.82%.

Given the economics of supply and demand, analysts at The Schork Report expect prices to hold around this equilibrium level—if prices increase consumers will cut back, if prices get too cheap refiners will suffer. The practical implication is that NYMEX WTI prices will likely be range-bound around current levels of 85.00- 95.00.

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Stephen Schork is the Editor of The Schork Reportand has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.